Right now, a lot of investors and business news junkies are incensed by Freddie Mac’s move to profit by intentionally giving their customers bad service.
And they should be. They just shouldn’t be surprised…
Because this is merely the latest of many examples of the government sponsored enterprise (GSE) behaving badly.
Freddie Mac, first formed in 1970 as the Federal Home Loan Mortgage Corp., was allegedly designed “to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership,” as its website claims. But as recent history has clearly shown, it and its partner in crime, Fannie Mae, have done anything but that.
One of the first publicly recognized signs of its history of corruption came in 2003, when Freddie was fined $125 million for essentially cooking its books between 2000 and 2002. But other than the measly penalty, the scandal led to nothing more than a small round of management layoffs.
No new regulations were slapped on the mortgage investment company. It was largely allowed to go about its business as usual, despite a few congressional and presidential attempts to reform the financial reprobate.
Congress Loves Freddie Mac
There’s an easy reason for why Freddie Mac got away with so much and continues to do so today: its incestuous relationship with Congress. As Politico reported on July 16, 2008:
“Over the past decade, they [Fannie Mae and Freddie Mac] have spent nearly $200 million on lobbying and campaign contributions… The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home. They’ve stacked their payrolls with top Washington power brokers of all political stripes…”
Put bluntly, they own key members of Congress, who know they won’t have nearly the same spending power come election time if they don’t make Freddie and Fannie very happy. Not that Congress seems all that broken up about being owned though, considering the significant investments many of them made into the companies before they both went all but belly-up.
Massachusetts Representative Barney Frank even dated a Fannie Mae executive in the 1990s, leading many to speculate whether the two were mixing business with personal gain. And it’s a documented fact that Frank, among others, fought long and hard to maintain that neither institution had any “safety and soundness problems.”
With those kinds of relationships going on, it’s no wonder that Fannie Mae’s former chief credit officer, Edward Pinto, went on to speculate that both GSEs were purposely misrepresenting their actions for years before either of them ever got caught.
The Financial Crisis and Beyond
With heavy government backing, government financing and government excuses, Freddie Mac and Fannie Mae essentially did whatever they wanted to do… which was make money by jeopardizing and ultimately wasting billions of taxpayer dollars to help push the housing market right into a dangerous position.
And that bubble eventually burst, as all of them eventually do.
As Bloomberg’s Jonathan Weil pointed out last month, they are hardly the only institutions to blame for the lingering financial crisis of 2008. The Fed, with its prolonged low interest rates and “worthless regulators or banks with excessive leverage,” deserves censure, as well.
But Fannie and Freddie still played an enormously significant part in the mess, and they did so of their own free and well informed will. So this latest round of overwhelming greed is just another example of Freddie Mac conducting business as usual.
Was it wrong that they purposely barred a majority of Americans from refinancing their homes in the midst of falling mortgage rates… then capitalized on their unethical actions by trading on that knowledge?
Of course!
Just don’t expect anything to change anytime soon. As evidenced by its past and present actions, Freddie Mac is one company that can – possibly quite literally – get away with murder in the future.
Good Investing,
Jeannette Di Louie
Article by Investment U